Gold prices surged during Friday’s trading session (August 23) as the US dollar index and US Treasury bond yields fell sharply after the Chairman of the Federal Reserve signaled that the central bank is ready to cut interest rates in September.
At the close of trading in New York, spot gold rose by $27.4/oz, or 1.1%, to reach $2,513.1/oz. Converted at Vietcombank’s selling rate, this price is equivalent to about VND 76.1 million/troy, an increase of VND 700,000/troy from yesterday’s morning session.
However, spot gold prices have yet to surpass the all-time high of $2,531.6/oz set on Tuesday. For the week, gold prices climbed 0.9%, following a 2.6% gain the week before.
In his highly anticipated speech at the Fed’s annual symposium in Jackson Hole, Wyoming, Mr. Powell suggested that the time has come for the Fed to lower interest rates. However, he did not provide any specific details on when the rate cuts would commence or the magnitude of the reductions.
“The time for monetary policy adjustment has arrived. The direction of policy is clear, but the timing and pace of interest rate cuts will depend on incoming data, the evolving economic outlook, and risk balance,” said the leader of the world’s most powerful central bank.
Markets continue to bet on a 100% chance of the Fed cutting rates in September, with odds for a 0.25 percentage point reduction at 63.5% and a 0.5 percentage point cut at 36.5%, according to data from the FedWatch Tool on the CME exchange.
Mr. Powell’s signals put downward pressure on the US dollar index and US Treasury bond yields, providing dual support for gold prices as the prospect of lower interest rates is inherently favorable for the precious metal.
The Dollar Index, which measures the greenback’s strength against a basket of six other major currencies, fell by 0.82% to close at 100.68. Yields on 10-year US Treasury notes lost 6 basis points to 3.801%, while 2-year yields declined by 10 basis points to 3.913%.
“Asset markets are reacting positively, at least initially, to Mr. Powell’s vague but somewhat open statement that the time for a policy adjustment may have arrived. Gold prices will likely continue their slow ascent ahead of the Fed’s September meeting, and the updated dot-plot forecast at that meeting will shed light on how many rate cuts the Fed foresees for this year,” said independent precious metals trader Tai Wong in New York, as quoted by Reuters.
The low-interest-rate environment benefits gold prices as the metal offers no yield. A weaker US dollar also bodes well for gold, as it is priced in dollars. Over the past month, the Dollar Index has declined by approximately 3.5%, according to data from MarketWatch.
Allegiance Gold’s COO, Alex Ebkarian, predicts that expectations of rate cuts will push gold prices toward the $2,550-$2,600/oz range.
However, some experts caution that gold prices do not always align with forecasts. Mount Lucas Management’s COO, Jerry Prior, told MarketWatch that gold does not “always move in lockstep with macroeconomic factors” and often exhibits unexpected fluctuations. Mr. Prior referenced the period of soaring inflation in 2022 – an environment that should have favored an inflation-hedge asset like gold – but gold prices remained stagnant and even declined at times, contrary to predictions from asset allocation models.
Mr. Prior added that “a consolidation of gold prices at current or higher levels would encourage trend-following investors to maintain their bullish gold positions” and that “a significant drop in gold prices would be required for them to switch to short-selling gold.”
Joy Yang, head of marketing and product management at MarketVector Indexes, opined that gold prices may have already priced in the news of Fed rate cuts, leading to potential profit-taking and price corrections at current high levels. Nonetheless, gold prices have yet to surpass the inflation-adjusted historical peak, and they do not fully reflect long-term inflation trends.
Lower interest rates and a weaker US dollar could further stimulate gold demand. “Even a slight increase in investor allocation to gold and gold mining stocks would extend the upward trend for gold prices,” Ms. Yang remarked.
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